BOE Heads to Meeting With Tight MPC Margin

The BOE is expected to stay put after slightly worse than expected inflation, but by a narrow vote margin that could leave open speculation for December's meeting.

Staying the Outlier

The central bank is in a complicated position, with the highest inflation among major advanced economies, but GDP is barely limping along. Growth figures for Q3 are not out yet, but the consensus is for -0.1%. The latest inflation figures are from August, which showed prices rising at 6.7% and above analyst consensus, who were hoping for a decline. What could be a bit of a relief for the BOE is that the next inflation data point for September is expected to show a substantial decrease as last year's gas price hike from Ofgen rolls off. In that direction, the latest BRC-Nielsen shop price index showed that prices grew just 5.2% in October.

That prospect is likely enough for the BOE to hold rates unchanged again at Thursday's meeting but leave the door open for further tightening at the December meeting. Analysts, however, expect the vote to be close again, which means there is a higher chance of a surprise. The last time around, it was five votes in favour of a pause against four for hiking. Switching would only take one member, and a 25bps increase would go through. On the other hand, one of the dissenters last time was Deputy Governor Jon Cunliffe, whose term is up on November 1 and will be replaced by Sarah Breeden, with some analysts thinking she will vote with the majority. The market might interpret a 6-3 vote to pause as a shift towards dovishness.

Setting Up for the Future

While rates are expected to remain the same, the BOE will likely want to put a hawkish bent on the pause, given the high inflation rate. The last time, the bank increased the amount it was rolling off of its Asset Purchase Facility (APF), effectively increasing quantitative tightening by 20%. Further quantitative tightening might not be an option, but strongly hinting that a rate hike is a possibility at the next meeting might be enough to satisfy the hawks on the MPC.

The larger reaction from the markets last time around was because the pause was unexpected, but this time, it appears that markets have adjusted. Since October, forward rates have dipped back down to 5.30% (above the current 5.25%), suggesting that money markets do not expect the BOE to deliver further hikes this year. Normally, the stock market would benefit from a rate hike pause, but the large exposure to international markets puts the FSTE 100 in a different position. However, it appears that central bankers worldwide are shifting to a wait-and-see attitude, with the BOE joining the trend that is generally seen as supportive of UK indices.

Footsie Ends Triangle Pattern

UK's Footsie could advance towards 7750 and beyond should the triangle pattern remains intact above the regional swing at 7215, but bulls will have to reclaim 7440 and 7580 prior to such an extension. Failing to hold the bottom will open up 7100, the 7K handle and eventually the low of 6700.

Source: SpreadEx / UK100

Key Takeaways

The BOE is heading into a policy meeting with expectations to keep rates unchanged but with a narrow margin of votes as it faces the highest inflation among major advanced economies while GDP growth is weak. The latest CPI showed prices rising at 6.7%, however, there may be a relief as the next inflation data point is expected to show a decrease. While rates are expected to remain unchanged, the BOE may signal a hawkish cue, given the high inflation rate, despite the expectation that further hikes are not likely this year. The Footsie may benefit from a rate hike pause as banks adopt a wait-and-see approach.